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Strategists Mull Journal Fed Story

By

Matt Phillips

Sep 28, 2010 8:54 am ET

Market watchers are parsing Journal reporter Jon Hilsenrath’s latest story on the Fed Tuesday, using it to recalibrate their understanding of the latest Fed statement, which opened the door to another round of money printing and asset buying — quantitative easing (QE) — by Bernanke & Co.

Camilla Sutton, Scotia Capital: He argues that the Fed is considering a smaller scale approach to quantitative easing, that could include monthly Treasury purchases that are extended or paused at each meeting. Essentially a QE-lite approach. The [U.S. dollar] came off its lows on the release of the article, as a QE-lite approach would be less negative for the USD then full fledge QE, like the one taken in 2009; however QE of any kind is still negative for the USD.

David Ader, CRT Capital: The Hilsenrath piece is a leap from his last Fed ‘insider’ story of several weeks ago, just before the Jackson Hole conference that said there was internal debate over QE within the Fed, i.e. to do it or not to do it. This article, however, seems to go directly to the style of QE, its data dependence, and not about Fed hawks railing against QE as a concept. In this sense it’s another prop for [U.S. bond] market.

George Goncalves, Nomura Securities: A recent WSJ article alluded to a concept that we at Nomura have been very vocal about – it mentioned that the Fed was contemplating that QE2 could differ from QE1 as it does not need the large ― shock and awe — format, but instead a more surgical and gradual approach of buying more [U.S. Treasurys] in the future at a defined run rate, but for as long as it takes. This has been our view all along and has been one of our key tenets of why we think bond investors that are buying strictly in the belief so that they can sell to the Fed at a higher price are flawed; it is a one-trick pony trade and not an analytic approach.

If the consensus view begins to form around this incremental concept, USTs could be in for a rude awakening as yields head higher. For investors that have been buying solely due to an expected supersized QE2, we caution that a scaled-back version of QE2 might lead to a less demand for Treasuries, which could potentially materialize as early as today, in the form of weaker bidding at the five-year auction.